Colorado faces historic challenge in regulating marijuana stores

A medical marijuana grower works at his site at a rented Denver metro area warehouse in this November, 2010 file photo. (Joe Amon, The Denver Post)

As Colorado prepares for the opening of historic recreational marijuana stores, state officials are preparing for something equally as unique — a regulatory challenge of almost maddening complexity.

Consider the headaches:

• Regulators must precisely audit the transactions of every pot store, even though those stores currently can't take credit cards and do business almost exclusively in slippery $10 and $20 bills.

• They must track the inventory weight of every business down to the gram, even though the weight of the same amount of marijuana can fluctuate daily based on things as variable as humidity.

• They must guard against both cash and marijuana leaking out of the legal market and into the black market, all while the federal government watches over their shoulder.

Faced with these challenges, marijuana regulators in Colorado stop short of guaranteeing an airtight system. But Ron Kammerzell, the state Department of Revenue's deputy senior director of enforcement, is confident the department will be able to catch most fraud.

"No control system is going to give you absolute assurance," Kammerzell said. "It's going to give you reasonable assurance."

Colorado's recreational marijuana regulatory plan — as well as its revised plan for regulating medical-marijuana dispensaries — will rely on two systems that dovetail together, Kammerzell said. The first is an inventory-tracking system. The second is a store's sales-tracking system. Together, Kammerzell said they should allow the state to monitor marijuana from the grow room until it leaves a store's showroom.

Over time, Kammerzell said, the system will give regulators statistical information about how much certain varieties of marijuana plants grown in certain conditions are expected to produce, as well as how much marijuana buds typically lose in weight as they dry out. The more fine-tuned the numbers are, the better regulators will be able to spot anomalies in a store's reporting.

"We're flying right now without that data," he said.

Once the pot hits the shop, regulators will check the inventory-tracking system against the store's sales-tracking system. For every purchase recorded in the latter, Kammerzell said, there should be a decrease in inventory reported in the former.

Kammerzell said the Department of Revenue has other procedures — which he declined to elaborate on — for making sure cash is accounted for that were derived from the department's regulation of casinos. Mandated surveillance cameras and video storage and on-site visits by auditors should also help keep businesses in line, he said.

As with the casino industry, Kammerzell said it will be tough to stop someone in the marijuana industry from pocketing a couple of bucks (or buds) here and there.

"The internal controls are going to catch when people get greedy," he said.

Matt Cook, the revenue department's former director of enforcement, said he is confident the marijuana industry can be regulated but said state officials could be doing more to catch fraud. Cook, who now works as a consultant on marijuana regulatory issues, said the department could require stores to use a common sales-tracking system or better standardize how transactions are recorded. He said the state could also better integrate the inventory, sales and video surveillance systems into a master system so auditors don't have to do so much manual cross-checking.

"Anytime you have a very large cash business, it breeds corruption. That's just human nature," Cook said. "From a regulatory standpoint, you want the most records and checks and balances in place."

But Cook acknowledged that those suggestions come with technical complexities, and Kammerzell said the goal initially was to make rules that are easily followed and enforced.

State Rep. Dan Pabon, a Denver Democrat who helped write the new laws for marijuana stores, said Colorado is putting marijuana stores "on the honor system, in some respects." But he said he expected regulators to be diligent in checking on stores and asking questions about discrepancies — as much to keep pot out of the black market as to make sure the state is getting what it's owed in taxes.

"The last thing we want is tax cheats," he said.

Store owners, meanwhile, have pledged they will be an ally in regulatory efforts, to ensure their own survival.

Norton Arbelaez, a partner in the RiverRock dispensary and a board member for the Medical Marijuana Industry Group, said his business has had to hire a "cash comptroller" specifically to keep track of the in-house books. Employees are schooled on how to keep proper records, Arbelaez said.

Because federal prosecutors could decide to crack down on stores that stray outside of state laws, Arbelaez said marijuana businesses have an extra incentive to follow the rules.

"If you're an irresponsible business owner in this business," he said, "you lose your freedom."

Kristi Kelly, an owner of the Good Meds dispensaries and a board member of the Cannabis Business Alliance, said her stores have developed internal protocols for keeping track of cash and "shelf shrink" of marijuana. At the end of every day, she said store employees square up their sales to their remaining inventory.

"If something's off," she said, "we make sure we stay there until it's reconciled."

Steps like those could make state regulators' jobs easier. But Kammerzell said auditors plan to do ample checking themselves. Because people from across the country and the world will be watching to see whether Colorado can effectively regulate pot, Kammerzell said Colorado must get this right.

"We're taking all reasonable steps and precautions to minimize diversion," he said.

John Ingold: 303-954-1068, jingold@denverpost.com or twitter.com/john_ingold

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